This document is available in two formats: this web page (for browsing content) and
PDF (comparable to original document
formatting). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. For an official signed copy, please contact the
Antitrust Documents Group.

I am delighted to have the opportunity to visit China again and to provide the
perspective of the U.S. Department of Justice on China's efforts to adopt an
antimonopoly law. We very much appreciate the willingness of our Chinese
colleagues to discuss with us complex issues that have arisen in the drafting process
and to hear about the lessons that we have learned from our long experience with
antitrust enforcement. I had the pleasure of meeting some of you when I visited
Beijing in March and look forward to continuing our discussions at this seminar.

As some of you know, I am Deputy Assistant Attorney General in charge of
international, appellate and legal policy matters in the Antitrust Division of the
United States Department of Justice. The Antitrust Division is led by Assistant
Attorney General Thomas Barnett, whom some of you may have met when he
visited Beijing in June of last year. The Antitrust Division is responsible for enforcing
the Sherman Act and the Clayton Act. We have exclusive authority to bring criminal
prosecutions for violations of the antitrust and related laws, and last fiscal year we
prosecuted 22 companies and 30 individuals for criminal violations of those laws.
We also share with our sister agency  the Federal Trade Commission 
responsibility for enforcing the antitrust laws against anticompetitive mergers,
non-criminal anticompetitive agreements and monopolization conduct.

Today, I would like to focus my remarks on three topics: premerger
notification requirements, analyzing abuses of a dominant market position, and the
relationship between intellectual property rights and the antimonopoly law.

Merger Issues

Appropriate Nexus

At present, more that 70 jurisdictions around the world have some form of
antitrust merger review, and when China's Antimonopoly Law is enacted, we will
add one more jurisdiction to that list. Globalization has also resulted in many more
transnational merger and acquisition transactions. The result of these two
developments is that more and more transactions are now facing review by multiple
antitrust authorities. Needless review by multiple antitrust enforcement authorities
can impose significant burdens and costly delays on corporate transactions, as well
as heavy and non-productive burdens on the resources of the reviewing agencies
themselves. This recognition led the International Competition Network (ICN), a
network of nearly 90 antitrust agencies devoted to promoting greater convergence on
sound competition principles, to focus much of its initial efforts on merger review
issues.

The result of ICN's work in this area was a set of recommended practices that
reflects international consensus on basic principles for premerger notification
systems. One of the most fundamental principles is that each antitrust regime
should seek to screen out transactions that are unlikely to result in appreciable
competitive effects in its territory so that transactions subject to its pre-merger
notification requirements have an appropriate "nexus" with its territory. ICN
recommends that this can best be done by requiring that at least two parties to a
transaction, or at least the acquired party, have material sales or assets within the
territory. Furthermore, ICN recommends that the evaluation of sales or assets be
limited to those of the entities or businesses that will be combined in the transaction.

We understand that China has considered requiring notification of mergers
where the combined sales or assets in China of all the parties to the transaction
exceed a certain threshold. This approach is specifically discouraged in the ICN
recommended practices, which say:

Notification should not be required solely on the basis of the acquiring firm's
local activities, for example, by reference to a combined local sales or assets
test which may be satisfied by the acquiring person alone, irrespective of any
local activity by the business to be acquired. [Comment 3 to Recommended
Practice C][emphasis added].

In other words, if, for example, China were to require notification of foreign
transactions where the combined sales or assets in China of the parties to the
transaction exceeded 5 billion yuan, that test in some circumstances could be satisfied
by reference to the sales or assets of just one firm, the acquiring firm. In that
situation, such a notification threshold would oblige that acquiring firm to notify all
of its transactions anywhere in the world, regardless of whether the acquired party in
each transaction has any connection to China. For example, if Boeing were to
establish a large facility in China, then Boeing's acquisition of even a very small
company in the United States with no connection to China  such as a small trucking
firm that does business only in the United States  would be needlessly subject to
notification in China.

In the United States, we ensure that transactions have an adequate nexus with the
United States by exempting certain foreign acquisitions from notification obligations.
We have two basic exemptions for foreign transactions: one for the acquisition of
foreign assets and one for the acquisition of foreign stock. We exempt acquisitions of
foreign assets where those assets generate less than about $57 million in annual sales
in the United States. We exempt the acquisition of stock in a foreign company where
the acquired company has less than about $57 million in assets in the United States,
or less than $57 million of annual sales in or into the United States. Moreover, where
the acquisition of stock in a foreign company is made by another foreign company,
and that acquisition does not give the acquiring company a controlling interest in the
other company  by which we mean that it will hold less than 50% of the acquired
company's voting stock  the transaction is exempt from notification obligations. I
would note that we also exempt transactions if both parties are foreign, the value of
the transaction is less than about $227 million and the combined sales of the parties in
the United States, and their combined assets in the United States, are both less than
about $125 million.(1)

Transactions Exempted from Notification Requirements

I understand that our Chinese colleagues may have an interest in
understanding what exemptions to premerger notification requirements may be
appropriate. In the United States, we have a number of exemptions, some set out in
statute, and others set out in implementing regulations. These exempted transactions
generally fall within one of two categories: either the transactions are of a type not
likely to raise substantive antitrust problems or the transactions are subject to
premerger competitive review by another regulatory agency. (In the latter case, the
regulatory agency will normally notify us of the transaction.) In addition to the
exemptions for foreign transactions I just described, some other examples of
transactions exempted from notification requirements include: (i) the acquisition of
assets in the ordinary course of business (such as the purchase of airplanes by an
airline); (ii) the acquisition of residential or commercial buildings, hotels, and
unproductive recreational or agricultural land; (iii) acquisitions where the acquiring
person and the acquired person are considered to be part of the same entity(2)
; and (iv)
the acquisition of less than 10% of a company's voting securities, if the acquisition is
solely for investment purposes. We also exempt bank mergers from our notification
requirements because they are subject to premerger competitive review by bank
regulatory agencies, which are required to obtain the views of the Antitrust Division
on the competitive effects of the transaction. I would point out that under the U.S.
system, even if a transaction is exempted from premerger notification requirements,
in almost all cases the antitrust agencies are still empowered to investigate the
transaction and take enforcement action if it is likely to result in a substantial
lessening of competition in a relevant market in the United States.(3)

Dominant Market Position and Abuse of Dominance

Let me now turn to the second topic of my remarks -- how best to approach
issues concerning the abuse of a monopoly or dominant market position. This is one
of the most difficult and challenging areas of antitrust enforcement policy. We all
can recognize the competitive harm that comes from competitors conspiring to fix
prices or allocate markets. But when one firm, acting unilaterally, decides to
compete aggressively, with the result that its competitors lose or have lower profits,
it is very difficult to distinguish between conduct that is harmful to competition and
conduct that is actually pro-competitive. If we, as antitrust enforcers, intervene to
stop or punish behavior that is actually efficient and procompetitive, then we have
done a disservice to our citizens and to the business community by harming the
competitive process.

An antitrust agency must be cautious about complaints it receives from
competitors. Such complainants often try to avoid legitimate competition by seeking
protection from the government from competitive pressures. Our job, however, is to
protect not individual enterprises but rather the proper workings of the market, and
the operation of the market means that some firms will succeed and others will fail.

For these reasons we have learned the importance of proceeding carefully
before concluding that the unilateral conduct of a firm  even a firm with monopoly
power  is in fact anticompetitive and warrants enforcement action. This does not
mean that we never challenge conduct under our monopolization statute  Section 2
of the Sherman Act. Indeed, we have brought several cases against firms with
monopoly power for engaging in conduct that made no economic sense other than to
exclude competition and to maintain their monopoly position. We will not bring an
enforcement action against the unilateral conduct of a firm with monopoly power,
however, unless rigorous economic analysis demonstrates two things: first, that the
firm does indeed have, or threatens to obtain, monopoly power; and second, that the
conduct is certain to be anticompetitive in light of the particular circumstances of the
relevant market.

Determination of Dominant Market Position

Under U.S. antitrust law, a firm has traditionally been considered to have
monopoly power when it has the ability to control prices or exclude competition over
an extended period of time. We hope that China's Antimonopoly Law will define
dominant market position in the same way.

In determining whether a firm has monopoly power, we first must determine
the relevant product and geographic markets in much the same manner as we would
in evaluating a transaction under our merger guidelines. There are almost always
several possible market definitions, and the correct market is frequently not obvious
at the beginning of an investigation. Once we are confident that we have identified
the appropriate product and geographic markets, and have determined the market
share of the firm under investigation, we will then carefully evaluate the structure
and dynamics of the market, entry barriers, technological innovation and other
factors  many of which are listed in the draft Antimonopoly Law  to determine
whether the firm in fact has the power to raise prices and exclude competition over a
sustained period of time. We do not believe that any presumptions of monopoly
power based solely on the market share of the firm are appropriate, or even helpful
to the business community, since the analysis depends so much on the unique factors
present in the particular market we are evaluating. Market share presumptions for
findings of joint dominance are even less useful, since it makes no sense to aggregate
the market shares of competitors to find collective dominance unless there is some
agreement among those firms to exercise their power jointly, at which point the
agreement can be addressed much more easily under provisions prohibiting
agreements among competitors that restrain competition. Therefore, we recommend
that China not presume the existence of a market dominant position based on market
share alone. Alternatively, if the Chinese Government believes that some
presumption is necessary, then we would recommend that it be a rebuttable
presumption, allowing the firm under investigation to show that it does not have the
durable power to raise price or exclude competition.

Although we believe it is not warranted to create a presumption that there
will be a finding of dominance above some minimum threshold of market share, it is
important to define the market share below which there will not be a finding of
dominance. In the United States, we do not pursue allegations of unlawful
monopolization if the market share of the subject company is less than 50%, since we
have not found a company to have the durable power to control prices and exclude
competition with such a small market share. Therefore, we believe it would be both
appropriate and helpful for China to provide in its antimonopoly law or subsequent
implementing rules or guidelines that market shares below a certain level -- such as
50% -- will not be deemed to constitute a dominant market position.

Determining Whether Conduct Constitutes an Unlawful Abuse

With respect to determining whether particular conduct by a firm with
monopoly power should be challenged under the antitrust laws, I would first note
that each of the examples of abusive conduct listed in the draft Law are the kinds of
conduct that competitive firms ordinarily engage in. They can also, in limited
circumstances, be used in an anticompetitive manner.

For example, selling at low prices is normally what we want companies  even
monopolists  to do. There are many legitimate reasons why firms might sell below
their cost, such as to clear warehouse space for new models, to sell products before
they become spoiled or obsolete, or to get consumers to try new products. In rare
instances, a dominant firm might try to price its products at unsustainably low levels,
not for any legitimate business reason, but only to drive its competitors out of the
market so that can raise prices to monopoly levels later. This strategy of what we call
"predatory pricing," however, is so inherently risky  since it involves sacrificing real
current profits for the very speculative possibility of recouping even more profits in
the future  that we have rarely seen it in the actual marketplace. If, in order to
prevent such rare cases, antitrust enforcement policy were to deter dominant firms
from discounting their products, such enforcement policy would cause much more
harm to the market than any possible benefit. Since aggressive price cutting is so
central to a properly functioning market, antitrust enforcement against aggressive
price cutting has a high danger of chilling the competitive process. Therefore, we
recommend that the Antimonopoly Law be both drafted and implemented in a way
that does not discourage legitimate aggressive discounting, even by firms with
dominant positions. This could be done by including in the Law or in implementing
regulations requirements (i) that the prices at issue be below an appropriate measure
of cost and (ii) that the dominant firm is likely to be able to recoup its losses in the
future.

This same reasoning applies to all the other examples of abusive conduct
listed in the draft Antimonopoly Law. Refusals to deal, exclusive dealing, tying, and
price discrimination all can be used for procompetitive, efficiency-enhancing reasons
and in only very limited circumstances will have anticompetitive effects, even when
used by a firm with a dominant market position. Indeed, practices such as these are
very common in highly competitive markets, reflecting that such distribution
methods can reduce costs and improve efficiency. Therefore, it is important that
these practices not be presumed to be anticompetitive, either in the law or by the
antimonopoly enforcement agency in implementing the law. These practices should
be viewed as unlawful only if, after a detailed analysis of the conduct, the market,
and proffered business justifications, it is determined that the conduct harms
competition by creating, maintaining or strengthening the monopoly power of the
dominant firm and that the conduct makes economic sense to the firm only because
of its anticompetitive effects.

Relationship between the Antimonopoly Law and Intellectual Property Rights

Finally, I'd like to talk about the relationship between the Antimonopoly Law
and intellectual property rights. The one article in the draft Antimonopoly Law
addressing this issue has received more attention from the foreign business
community than any other provision. These concerns have been heightened by
speeches by various Chinese officials and press reports complaining of licensing
practices of some foreign technology companies that some Chinese companies
believe are unfair and calling for compulsory licensing of foreign technology. Some
of the reported statements expressly referenced the need to use the Antimonopoly
Law to accomplish that goal.

There is now international consensus that innovators must be provided the
right to exclude others from appropriating their inventions if they are to have
sufficient incentive to engage in research and development activities despite the
substantial costs and risks inherent in such activities. It is also well recognized that
technological innovation is one of the most important factors in fostering a dynamic
and competitive market. Innovation drives down costs, brings new products to
market and allows new entrants to overcome the advantages and entry barriers
enjoyed by incumbent dominant firms.

There is, therefore, no conflict between the exclusive rights offered by the
intellectual property laws and the promotion of consumer welfare by the antitrust
laws. We, as antitrust enforcers, must allow intellectual property right holders to
enjoy the benefits of their IP rights. In other words, they should be free to exercise
their right to exclude others from using an invention protected by patent or
copyright, or to license some applicants but not others, without fear of challenge
under the Antimonopoly Law. Similarly, IP right holders should be able to take
advantage of the incentives provided by the IP laws by being free to charge as high a
royalty as the market will bear without having to worry that it might be construed as
an abuse of their IP rights or of their market position.

That being said, it is also true that the exercise of intellectual property rights
may be combined with other action not necessarily contemplated by the intellectual
property laws in such a way as to raise legitimate antitrust concerns. Those
situations must be carefully analyzed on a case-by-case basis, just like any other
anticompetitive agreement or abuse of dominance allegation, to determine whether
competition has been unreasonably restrained. Where restrictions in licensing
agreements are at issue, it is important to recognize that most IP licensing practices
are procompetitive, and those practices are often aimed at facilitating the
dissemination of technologies into the marketplace, reducing transaction costs and
preventing free-riding. It is also important to remember that intellectual property
right holders should not be presumed to have a market dominant position just
because they hold a patent or copyright. In many cases, there are other products or
technologies that compete with the patented or copyrighted item and that prevent
the exercise of any monopoly power.

The extent to which investment in research and development takes place is
dependent on the confidence that innovators have that, if their efforts prove
successful, they will be able to take advantage of the benefits of their intellectual
property rights in the future. Thus statements calling into question whether those
intellectual property rights will be protected in China can have a significant negative
impact on innovation for years to come. I hope that our colleagues in China will
make efforts to provide assurances to the domestic and foreign business communities
that the Antimonopoly Law will be implemented in a way that respects and
supports the full and legitimate exercise of intellectual property rights.

Conclusion

Let me conclude by thanking the Ministry of Commerce, Asian Development
Bank and OECD for inviting me to participate in this seminar. Enactment of the
Antimonopoly Act will constitute an important milestone for China, but it will be
only the first step in establishing an effective competition policy that truly benefits
the Chinese market. Developing a sound enforcement policy and training the staff of
the Antimonopoly Authority to implement the Law in a coherent and effective
manner will present significant challenges. Our agencies stand ready to assist you in
that journey and to help China realize its goal of having a world-class antimonopoly
regime. Thank you for considering our views and I look forward to a good
discussion during the rest of the seminar.

FOOTNOTES

1.
All of these premerger notification thresholds are adjusted annually based on changes
in the Gross National Product of the United States.

2.
Examples would include the acquisition of voting securities of a company where 50%
or more of its voting securities are already held by the acquiring person, or transactions
in which assets are transferred from one controlled corporate subsidiary to another
controlled subsidiary.

3.
A complete list of exempted transaction can be found in 15 U.S.C. §18a(c) and 16 CFR
Part 802.